Question 1

_________ are a type of long-term debt capital whose claims legally follow after the claims of depositors.

Accepted Answer

The answer of _________ are a type of long-term debt...

Question 2

Which of the following would not be an example of operational risk?

Accepted Answer

A) A bank,on the coast of Louisiana,is hit by a hurricane and is flooded for 6 weeks. 
B) A bank employee working as a derivatives trader,is also the one who writes the reports on profits and losses in derivatives trading every day. 
C) The banks older computer system breaks down causing a loss of service to customers for 2 weeks. 
D) A bank robber robs a teller at gun point and gets away before police can get to the bank. 
E) All of the examples are of operational risk.

Question 3

According to the textbook,the role(s)of capital is to:

Accepted Answer

A) provide a cushion against failure risk. 
B) provide funds needed to charter,organize,and operate a bank. 
C) promote public confidence. 
D) support growth and the development of new services. 
E) All of the options are correct.

Question 4

A bank has capital to risk-weighted assets of 9.2%,Tier 1 capital to risk-weighted assets of 5% and a leverage ratio of 4.8%.What type of bank is this?

Accepted Answer

A) Well capitalized 
B) Adequately capitalized 
C) Undercapitalized 
D) Significantly undercapitalized 
E) Critically undercapitalized

Question 5

Basel II requires each bank to determine its own capital requirements based on its own calculated risk exposure.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following would be an example of exchange risk?

Accepted Answer

A) A bank manager embezzles $1,000,000 from the bank. 
B) A bank that loses $500,000 from trading in foreign currencies. 
C) A $1,000,000 loan given to a business,on which no interest or principal has been collected in 2 years. 
D) A bank manager predicts interest rates will rise.However,interest rates fall causing the bank's net income to fall by $250,000. 
E) All of the options are examples of exchange risk.

Question 7

Which of the following is not a weakness of Basel I risk-based capital standards?

Accepted Answer

A) They ignore interest rate risk 
B) They ignore changes in value due to currency value changes 
C) They ignore changes in value due to commodity price changes 
D) They ignore credit risk 
E) They ignore the market value

Question 8

At the center of the debate of the Basel Agreement is the ____________,headquartered in Basel,Switzerland,which assists central banks in their transactions with each other and serves as a forum for international financial issues.

Accepted Answer

The answer of At the center of the debate of...

Question 9

One of the reasons to regulate the capital position of banks is to limit the risk of bank failures,especially large bank failures.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following would be an example of interest rate risk?

Accepted Answer

A) A bank manager embezzles $1,000,000 from the bank. 
B) A bank that loses $500,000 from trading in foreign currencies. 
C) A $1,000,000 loan given to a business on which no interest or principal has been collected in 2 years. 
D) A bank manager predicts interest rates will rise.However,interest rates fall causing the bank's net income to fall by $250,000. 
E) All of the options are examples of interest rate risk.

Question 11

In the United States a 'well capitalized' bank must have a ratio of capital to risk-weighted assets of at least:

Accepted Answer

A) 6 percent. 
B) 8 percent. 
C) 10 percent. 
D) 5 percent. 
E) None of the options is correct.

Question 12

Even if individual banks are good at forecasting risk using VaR models,there may still be problems because losses may occur at several banks at the same time due to the interdependency of the financial system,magnifying each bank's risk exposure and possibly causing a major problem for regulators.The book calls this:

Accepted Answer

A) systemic risk. 
B) operational risk. 
C) credit risk. 
D) market risk. 
E) liquidity risk.

Question 13

The Perdue Bank of Houston,has just hired a new manager who has a reputation of anticipating potential problems and acting quickly to prevent those problems so that the bank stays healthy and profitable.What defense against risk is this bank making?

Accepted Answer

A) Portfolio diversification 
B) Geographic diversification 
C) Quality management 
D) Increasing owners' capital 
E) None of the options is correct.

Question 14

Core capital includes the surplus value of common stock.

Accepted Answer

A) True 
 B)False

Question 15

A bank has $200 million in assets in the 0 percent risk-weight category.It has $400 million in assets in the 20 percent risk-weight category.It has $1,000 million in assets in the 50 percent risk-weight category and has $1,000 million in assets in the 100 percent risk-weight category.This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital.What is this bank's ratio of Tier 2 capital to risk assets?

Accepted Answer

A) 6.08 percent 
B) 3.04 percent 
C) 9.11 percent 
D) 5.54 percent 
E) None of the options is correct.

Question 16

There are three pillars of Basel II.One of them is to make market discipline a powerful force compelling risky banks to lower their risk exposure.What does Basel II want to do to make this happen?

Accepted Answer

A) Require minimum capital requirement based on the bank's own evaluation of its risk. 
B) Require greater public disclosure of each bank's true financial condition. 
C) Expand the risks to be evaluated to include credit risk market risk,and operational risk. 
D) Require a supervisory review of each bank's risk evaluation procedures. 
E) All of the options are correct.

Question 17

Geographic diversification refers to the spreading out credit accounts and deposits among a wide variety of customers within a country,including large and small business accounts,different industries,and households with a variety of sources of income and collateral.

Accepted Answer

A) True 
 B)False

Question 18

In the United States a bank to be considered 'adequately capitalized' must have a ratio of Tier 1 (or core)capital to risk-weighted assets of at least:

Accepted Answer

A) 8 percent 
B) 6 percent 
C) 10 percent 
D) 4 percent 
E) None of the options is correct.

Question 19

If the ratio of tangible equity capital to total assets is 2 percent or less,it is subject to being placed in conservatorship or receivership unless the institution's principal regulator and the FDIC determine that it would be in the public interest to allow the institution to continue under present ownership and management.

Accepted Answer

A) True 
 B)False

Question 20

One of the key pillars for capital regulation in Basel II was to require banks to hold capital against its own estimated risk exposure from operational risk.

Accepted Answer

A) True 
 B)False

Exam 15: The Management of Capital

_________ are a type of long-term debt capital whose claims legally follow after the claims of depositors.

Which of the following would not be an example of operational risk?

According to the textbook,the role(s) of capital is to:

A bank has capital to risk-weighted assets of 9.2%,Tier 1 capital to risk-weighted assets of 5% and a leverage ratio of 4.8%.What type of bank is this?

Basel II requires each bank to determine its own capital requirements based on its own calculated risk exposure.

Which of the following would be an example of exchange risk?

Which of the following is not a weakness of Basel I risk-based capital standards?

At the center of the debate of the Basel Agreement is the ____________,headquartered in Basel,Switzerland,which assists central banks in their transactions with each other and serves as a forum for international financial issues.

One of the reasons to regulate the capital position of banks is to limit the risk of bank failures,especially large bank failures.

Which of the following would be an example of interest rate risk?

In the United States a 'well capitalized' bank must have a ratio of capital to risk-weighted assets of at least:

The Perdue Bank of Houston,has just hired a new manager who has a reputation of anticipating potential problems and acting quickly to prevent those problems so that the bank stays healthy and profitable.What defense against risk is this bank making?

Core capital includes the surplus value of common stock.

There are three pillars of Basel II.One of them is to make market discipline a powerful force compelling risky banks to lower their risk exposure.What does Basel II want to do to make this happen?

Geographic diversification refers to the spreading out credit accounts and deposits among a wide variety of customers within a country,including large and small business accounts,different industries,and households with a variety of sources of income and collateral.

In the United States a bank to be considered 'adequately capitalized' must have a ratio of Tier 1 (or core) capital to risk-weighted assets of at least:

One of the key pillars for capital regulation in Basel II was to require banks to hold capital against its own estimated risk exposure from operational risk.